The US has three primary types of tax systems: progressive, proportional, and regressive. But how can we recognize which of the three tax systems is regressive? Our tax consultancy services explain regressive tax as follows:
Each system affects each taxpayer differently, depending on income. For low-income earners, the regressive tax system is frequently thought to be the most burdensome.
What is a Regressive Tax?
Regressive tax meaning: A regressive tax system disproportionately impacts people with lower incomes. Regressive taxes are imposed consistently, regardless of income.
In contrast, progressive taxes are determined by an individual’s capacity to pay.
This uniformity burdens people with lower incomes more. Therefore, a larger portion of their income is spent on paying these taxes.
Read: Do strippers pay taxes?
Examples of Regressive Tax
You can learn which of the three tax systems is regressive with the help of the following typical instances:
Sales Taxes
Everyone pays the same amount due to the consistent application of sales taxes on consumer goods. However, low-income earners pay a larger percentage of sales tax because they spend a larger percentage of their income on products.
Excise/Sin Taxes
Levies on gambling, alcohol, and cigarettes are likewise regressive. These charges are also called sin taxes, a form of excise tax. People with low wages are disproportionately affected. Although they are intended to discourage consumption, they spend more of their wages on these items.
Property Taxes
Homeowners pay a fixed rate determined by the value of their property. In contrast, it can be more difficult for those with lower incomes to fulfill these tax commitments than those with higher incomes.
Read about property taxes on new construction.
How Regressive Taxes Work?
Let’s understand the regressive tax definition in detail with this example.
Suppose two individuals: Person A earns $20,000 yearly, and Person B earns $100,000 yearly.
Person B would pay 5% of his income in taxes. In contrast, person A would pay 1% if both A and B paid the same amount in sales tax (e.g., $1,000).
This demonstrates how sales taxes are regressive. They take a higher proportion of revenue from low-salary earners than high-income earners.
Read: What is a VAT number in the US?
The Bottom Line
Now you know which of the three tax systems is regressive!
The regressive tax system burdens low-income earners more than the proportional, progressive, or regressive tax systems. These taxes seem reasonable at first glance. However, they disproportionately impact the people who can least afford them. When this relationship is understood, it becomes obvious why many people believe that regressive taxes are less egalitarian than other tax systems.
Contact L&Y Tax Advisor for your personal or professional taxation matters.
